Are “Luxury shopping tours” the future of luxury retail in China?

Chinese customers seem to have (relatively) deserted luxury flagship stores in Shanghai, but they are at the same time rushing into the same flagship stores in Paris, London, or New York. Is that a new trend? Who will be the winner?  Luxury industry or Travel industry?

We would like to thank all contributors for their participation to this collective article. This discussion has been started on May 17, 2010, and ended on June 4, 2010, on the professional blog “Luxury Society”.

Pierre Gervois Living in Shanghai I can see nearly every month a new flagship store bigger than the previous shops for brands such as Cartier, Louis Vuitton, Piaget, Chanel…
The problem is these shops are nearly empty. Between my home and my office, I can see directly a dozen of these flagship stores every day when I’m in the taxi. And I rarely see a Chinese customer inside… Most of the time, I can witness the staff looked really bored in these luxury, empty shops.
Obviously, the big groups (Richemont, LVMH, PPR…) have seen too big. The demand is very far to be what they have expected, probably based on false statistics on the consumption capacity of the Chinese consumers.
What is your opinion, specially if you live in China ?

Timothee Semelin Actually, I would say I was thinking the same thing a couple of years ago about the Beijing flasgship store scene. 
Then after I get to know more and more people in the luxury retail and working directly with some brands, what we can say is that the huge amount of money those brands make are not coming from the outstanding number of clients they have but more on the few BIG clients that they have .
On a one shot shopping that could spend hunderd of thousands of RMB and thus, those shops do not need many clients for now.
Plus those BIG clients may spend their time in the VIP area of the shops that you won’t see from outside the shop and I am not talking about the private sales… A flagship store is not always the key shopping place.
The question is how long this will last, because the BIG clients will have more and more brands to choose from and at some point, brands will also need more casual shopping people. when will they reach their turning point?
You should read this:http://thechinaobserver.com/2010/05/what-are-chinas-luxury-consumers-buying/

Pierre Gervois Many thanks for your very interesting comment. Yes, there are some private and discreet sales, but not that many. The biggest Chinese spenders will go directly to Paris, Geneva of NYC to buy the most expensive pieces. This is actually a big isue for luxury brands. They have not anticipated that Chinese consumers wuld travel abroad so easily for luxury shopping. 
In my opinion, the future of luxury retail for Chinese consumers is in “Luxury shopping travel”…

Timothy Coghlan Another two reasons for the big (albeit empty) flagship stores are as follows:
Prime real estate for luxury stores is running out fast in Shanghai, as it is in Beijing and already has run out in Hong Kong. Therefore brands are snatching up locations now before they run out even if it means operating at a loss for a few years.
The other reason is that they are simply acting as a ‘flagship’ that looks big and very pretty and gets noticed and lots of press. In this case the stores are more for show and prime streetside advertising space than as a revenue earner. Its essential for the brands to have presence in the big cities, but they often make most of their revenue from 2nd and 3rd tier cities, where the consumers are wealthy but not so sophisticated and prone to overseas travel.

Mireille Weber I have noticed that in Shanghai : luxury stores in beautiful malls , always empty, and staff yawning all day long.It is the other way round in Hong Kong!  We also know that the leases are quite expensive : between 150 000 and 180 000 RMB. per month if not more…. 
I guess it is part of the luxury brand’s strategy, they all have to be in Shanghai nowadays for obvious reasons. I do not agree with you : the demand is there, but most of the Chinese fly to Hong Kong to buy those items ( I am talking about luxury perfumes, my field), 
the import taxes in mainland China are too high + in Hong Kong, they are pretty sure to buy the real thing.

Ahn’na Hargrove Just finished our most triumphant supercar show in Monaco. We had partnership with The Hurun Report who brought one of their listed clients. He said that they preferred luxury travel and are the number 1 spenders in Paris at the great luxury stores. Buying in China for the richest doesn’t provide the international clout they have when travelling abroad.
Everyone at the show loved them and sought them. They loved the publicity and the cameras on them as they shot from one supercar to the next. It’s about time!

Felice Jiang I would agree that luxury travel is a major reason why those storefronts may be empty, and that it is not an issue with demand. We’ve covered outbound Chinese tourists extensively, with most predictions showing that they will be on the rise. As much as 75% of Chinese Businessmen are planning to travel even more this year. 
We also reported recently about the results of a survey, that 50% of luxury purchases were intended as gifts, likely a result of the loosening of travel restrictions and an increase in “shopping tourism.”
For the complete article: 
http://www.jingdaily.com/en/luxury/50-of-luxury-purchases-by-chinese-in-2009-were-gifts-survey/

Emilyn Lee Having store front = brand visibility and presence.
Brands that want to make an impact, giving an impression of having strong fundamentals and brand heritage, often go with a large store presence in key locations.
Besides, out of sight = out of mind.

Pierre Gervois Thank you for all these very interesting comments and analysis. Luxury travel is maybe the future of luxury retail for wealthy Chinese consumers…

Timothy Coghlan There is another reason I forgot to mention which is the malls will agree to a percentage of revenue (usually 5% or less) only as rental fee. For the top 10 or so luxury brands, developers will also pay 3000-4000 Euros per square metre fit out fee for the stores. Therefore the the top luxury brands get the store built for them and only have to pay a percentage of what they make.

Amalia Agathou What a great thread! Thanks everyone for the insights, I find the Asian market fascinating!

Jerome Mackay Yes, a great thread indeed! 
I must add that hearing about all these huge flagship stores does put off smaller brands who somehow get the impression that these big empty shops are the only way to do business in China and that it’s extremely costly. 
Surely there must be some smaller and successful operations too?

Alexandre Niepce Yes what an interesting subject and constructive insights! 
Living in Shanghai too for two months now, my point of view is that biggest Luxury Brands may have entered the game to easily and have omitted to elaborate a deep strategy to reach a maximum of customers. The Chinese market is much more complex than it first seems and even if the potential is there, huge and customers ready to buy, some key elements have to be taken into account: time, trust, culture understanding… Chinese market is also not waiting for us to undertake it but already shows signs of self development.

Pierre Gervois Yes, Alexandre, you have perfectly understood the core issue : Culture understanding. Major Foreign luxury brands have still a lot to do…

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